TITLE TALK: TO INSURE OR NOT INSURE - THAT IS THE QUESTION
Imagine this, you find the home of your dreams, sign a contract to purchase the home, but now you – a first time home buyer – are hit with all types of terms that you are not familiar with. One of the most common questions we are asked revolve around insurance. What is Title Insurance? Is this the same as Homeowner’s Insurance? The list goes one. Search no further, you’ll find your answers here.
I. TITLE INSURANCE
Purchasing any type of real estate, whether for investment purposes or personal use, is accompanied with risk. What if there have been fraudulent transfers, improper recordation, and/or a break in the chain of title? This risk is minimized with the purchase of Title Insurance.
Because the County Clerk in which the property is located does not insure that the recordings are done accurately, Title Insurance is monumentally important to protect the insured party. So, what is Title Insurance?
Title insurance perfects the owner’s title rights by defending against any defects in title that may arise, that may result in financial loss, and even potentially, loss of ownership. In the event that there is a fraudulent transfer, the title company will defend against lawsuits that attack title, or in the case of a covered loss, reimburses the insured party up to the policy limit. There are two types of Title Insurance Policies: Owner’s Title Policy and Mortgagee Policy.
A. Owner’s Title Policy
Title companies issue a Owner’s Title Policy in the amount of the real estate purchase. The fee for this policy is a one-time fee and is paid at closing. This policy protects the buyer for as long as the buyer has an interest in the property. This policy kicks in, in the event that an issue covered by the policy arises. If an issue arises, the title company will defend these claims, IF the claim arises after the purchase of the property. The title company DOES NOTcover any increase in your property's value, unless you buy an increased value endorsement.
Some of the most common title issues that arise include:
· Forgery or fraudulent transfers
· Errors or omissions in the deed
· Mistakes in recording
· Mistakes in examining records
· Discovering undisclosed heirs to the property
B. Mortgagee Policy
If the property is purchased with a loan from a lender, the lender will require a Mortgagee Policy to be issued. The Mortgagee Policy is issued by the title company and is based on the principal amount of the loan; this policy will only protect the lender’s interest. The policy will remain until the principal of the loan is paid in full and released by the lender. The policy amount will decrease as the loan is paid off. In the event that the buyer refinances the property, the lender will require the buyer to purchase a new loan policy. Thus, when the new loan pays off the existing loan, the old loan policy expires.
II. HOMEOWNER’S INSURANCE
To answer your first question, yes, Title Insurance is not the same as Homeowner’s Insurance. Homeowner’s Insurance will provide protection to the actual home and personal property in the home. Contrast that with the Owner’s Title Policy, which protects the actual title to the real estate. Homeowner’s Insurance is purchased to protect the structure of the home and its contents from adverse events that are covered in the policy. If analyzed closely, one will realize that Homeowner’s Insurance will indirectly provide financial protection for the lender, if any.
III. FLOOD INSURANCE
Almost three years after Hurricane Harvey, Houston homeowners are still paying the price for that disastrous flood. So, if you ask us, a title company in Houston, if purchasing Flood Insurance is important, we will answer that question with a resounding YES!
Flood Insurance is an insurance policy that is purchased to cover dwellings from losses sustained by water damage that was specifically caused due to flooding or by heavy prolonged rain, melting snow, coastal storm surges, blocked storm drainage systems, or levee dam failure. In many areas, a flood is considered a vis major (superior force or Act of God) event, and the damage or destruction it causes are uncovered if the homeowner does not purchase this supplemental insurance.
IV. PRIVATE MORTGAGE INSURANCE
FORECLOSURES HAPPEN AND ARE SCARY- both to the buyer and the lender. Lenders want to protect their financial interests, as they should, and they do so by requiring the mortgagor (the borrower) to purchase Private Mortgage Insurance (PMI). This insurance only protects the lender in the event that the mortgagor defaults (stops making payments) on the mortgage. Whereas Homeowner’s Insurance will protect both the borrower and, indirectly, the lender's assets, mortgage insurance solely protects the lender's asset: the repayment of the mortgage loan. In order to compensate for the extra risk engendered by the lender's higher exposure, lenders typically require mortgage insurance to be purchased by borrowers who make smaller down payments.
We understand that purchasing a home comes with a lot of questions and decisions. We can help! Feel free to contact us and our Closing Attorneys at (713) 227-7500, firstname.lastname@example.org, or email@example.com.